Buxbaum v. Aetna Life & Casualty Co.

• Decision Date: 01 November 2002
• Docket Number: No. B146226.,B146226.
• Court: California Court of Appeals Court of Appeals
• Parties: David BUXBAUM et al., Plaintiffs and Appellants, v. AETNA LIFE AND CASUALTY COMPANY et al., Defendants and Respondents.

126 Cal.Rptr.2d 682

103 Cal.App.4th 434

David BUXBAUM et al., Plaintiffs and Appellants, v. AETNA LIFE AND CASUALTY COMPANY et al., Defendants and Respondents.

No. B146226.

Court of Appeal, Second District, Division 1.

November 1, 2002.

Certified for Partial Publication.^*

Review Denied Jan. 15, 2003.

Buxbaum & Chakmak and Charles L. Zetterberg, Newport Beach, for Plaintiffs and Appellants.

Rudloff Wood & Barrows and G. Edward Rudloff, Jr., for Defendants and Respondents.

MALLANO, J.

A law firm sustained water damage that had the effect of reducing the number of hours billed to clients during the week after the flood. The firm made a claim under its business interruption insurance policy, asserting that, during the one-week period, its attorneys billed less than usual. The insurer offered to settle the claim on terms that the firm rejected. This lawsuit followed.

The trial court granted summary judgment in favor of the insurer. We conclude that summary judgment was proper because the law firm did not "suspend operations" within the meaning of the policy. Rather, it continued to operate, albeit at reduced capacity.

I BACKGROUND

Buxbaum & Chakmak is a law corporation with offices in Claremont and Newport Beach, California. On the weekend of Saturday, February 19, 1994, a water pipe broke at the Claremont office, flooding the premises. Monday, February 21, 1994, was Washington's birthday, and the office was closed. When employees arrived for work on Tuesday, February 22, 1994, they found that most of the floor was covered by two inches of water, the carpet was ruined, the walls and wallpaper were soaked, the furniture was wet, and the computer system had crashed due to moisture.

The law firm had a property/liability insurance policy with Aetna Services, Inc. The policy also provided coverage for loss of business income, commonly called business interruption insurance. On February 23, 1994, the firm submitted a property damage claim under the policy and, within a few months, Aetna paid the firm $5,160.40 on the claim.¹

On June 6, 1994, John Chakmak, one of the firm's principals, wrote to Aetna, making a claim under the business interruption coverage for "[t]ime lost by attorneys due to water damage because of flooded office and necessary damage repair." On the firm's letterhead were the two office addresses and the names of seven attorneys. Attached to the letter was a list containing the names of three attorneys, the number of hours they had "lost" due to the flood, their hourly billing rates, and the total dollar amount of the loss, $6,805. The list made no reference to the firm's other attorneys, and the record is silent as to their work.

The business interruption coverage provided that "[the insurer] will pay for the actual loss of Business Income [the insured] sustain[s] due to the necessary suspension of [its] `operations' during the `period of restoration.'" "Operations" was defined as "[the insured's] business activities occurring at the described premises." The coverage applied to the premises at both of the law firm's locations. But, unlike the Claremont office, the Newport Beach office apparently did not suffer any type of damage, and business continued there as usual. On appeal, the parties focus on whether there was a loss of business income at the Claremont office. Consistent with that approach, we use the terms "law firm" and "firm" to refer to the Claremont office only.

By letter dated July 12, 1994, Matthew Tait, an Aetna claims representative, informed Chakmak that "[y]our policy provides coverage for Business Income Loss which is Net Income (Net Profit or Loss Before Income Taxes) that would have been earned or incurred. The policy does not provide for `lost time'; continuing normal operating expenses [is] an element to be considered when evaluating your Business Income Loss. Please provide us with documentation to support your Net Income loss."

During the next several months, Chakmak and Tait discussed the policy provisions and the information Aetna needed to process the firm's claims. On the property damage claim, Tait visited the firm's Claremont office on January 27, 1995, and learned that certain items, including the ruined wallpaper and paint damage, had not yet been repaired. Within two weeks, Tait completed his estimate to finish the repairs. On February 8, 1995, Aetna paid the firm $7,966.78. In total, Aetna paid $13,127.18 on the property damage claim.

On the business interruption claim, Tait retained Campos & Stratis, an accounting firm, for assistance. Robert Salata, a forensic accountant, was assigned to the matter. By letter to Chakmak dated January 27, 1995, Salata requested the daily time sheets from January through March 1994 for the three attorneys claiming a loss of time. Salata also requested a profit and loss statement for the 1993 calendar year.

On May 16, 1995, Chakmak informed Tait by letter that, in order to preserve the confidential and privileged information of the firm's clients certain information would have to be redacted from the time sheets, namely, the clients' names and the description of the services rendered. The following day, Chakmak mailed the redacted time sheets and the profit and lost statement to Salata. Over the next few months, Campos & Stratis contacted Chakmak with follow-up questions and obtained additional information.

In calculating lost income, Campos & Stratis first determined the average number of hours worked per day before the flood. Those figures were then compared to the actual number of hours worked after the flood. As it turned out, the time worked by each of the attorneys after the flood was close to or exceeded the average time worked in the weeks before the flood. Campos & Stratis concluded that the law firm had sustained a loss of income in the amount of $125.

On September 18, 1995, Campos & Stratis sent its report, which included various schedules of data, to Tait, who in turn forwarded the report to Chakmak. On March 28, 1996, Chakmak wrote to Tait, describing the report as "completely erroneous" because Campos & Stratis had categorized several hours of post-flood work as time chargeable to a client ("billable" time) when it was actually spent on flood-related tasks such as cleaning up the office. Of course, the Campos & Stratis report was based on the law firm's redacted time sheets, which did not provide a description of the work performed.

To assist Campos & Stratis in reevaluating the business interruption claim, Chakmak submitted a new set of time sheets that, while not disclosing any client information, did provide a description of the services rendered. For example, the time sheets showed that on the Wednesday following the flood, one of the attorneys spent four hours on flood-related problems and about five hours on billable matters. In general, the time sheets reflected that kind of daily mix for all three attorneys.

With the more detailed time sheets, Campos & Stratis prepared a second report with revised schedules, showing a loss of business income totaling $3,220. In a transmittal letter to Tait, Campos & Stratis stated: "[P]lease be advised that we believe there are the following issues that need to be considered and evaluated: [¶] ... Regarding the actual loss sustained: [¶] a) Did the insured really lose the time? [¶] b) Collectibility—Typically a firm does not collect 100% of the amount billed. What percentage of the amounts billed are actually collected? That amount should be applied to the calculated fees lost."

On May 8, 1996, Tait sent Chakmak the revised schedules. On May 24, they spoke by telephone, discussing the firm's claim for lost income. Tait offered to settle the matter for $3,220.

By letter dated June 7, 1996, Chakmak informed Tait that the firm disagreed with Aetna's interpretation of the insurance policy. On June 25, 1996, Tait sent Chakmak a letter, stating: "There has been and continues to be some question regarding the actual business ... loss sustained. Nevertheless, in good faith, we have attempted to adjust this portion of your claim based on information and documentation you have provided us. The most we have been able to estimate owing for your loss of business income, giving your claim every reasonable benefit of the doubt is $3,220 .... Enclosed is a check reflecting this amount as payment for this portion of your claim." On August 20, 1996, Chakmak returned the check by mail.

Tait wrote to Chakmak again on October 23, 1996, stating: "[A]s you previously have been advised, [Aetna] reserves all rights and defenses that it has or that may arise under the [insurance] policy and/or California law. Neither the writing of this letter, nor any actions taken by [Aetna] and/or its authorized representatives in connection with the ... policy, shall constitute or be deemed to be a waiver of ... any of the rights and defenses it may have ...." Chakmak quickly responded with a letter of his own, reserving all rights and claims on behalf of Buxbaum & Chakmak. Finally, on November 27, 1996, Tait sent Chakmak a replacement check for $3,220, assuring Chakmak that it could be cashed without prejudice to the law firm's rights. The check was not returned.

On July 10, 1997, Buxbaum, Chakmak, and the firm (collectively the law firm or the firm) filed this action against Aetna and Tait (collectively Aetna), alleging two causes of action: (1) breach of the duty of good faith and fair dealing and (2) violation of the California Unfair Competition Law (Bus. & Prof.Code, §§ 17200-17209). After a series of demurrers, the firm filed a third amended complaint on September 11, 1998, alleging the same two causes of action.

On February 1, 1999, Aetna filed a motion for summary judgment or, in the alternative, for summary adjudication of issues, arguing that it did not withhold benefits due under the policy, and, even if it did, there was a reasonable basis for doing so. On March 3, 1999, the...